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Yahoo! Inc. (YHOO), the largest U.S. Web portal, is eliminating about 2,000 jobs, or 14 percent of its workforce, to help Chief Executive Officer Scott Thompson cut costs and accelerate a turnaround effort.
The move will save about $375 million annually, Sunnyvale, California-based Yahoo said today in a statement. Yahoo, which had 14,100 full-time employees at the end of last year, expects to record a pretax expense of $125 million to $145 million -- with the majority coming in the second quarter.
Thompson, who took over as CEO in January, is reorganizing operations in a bid to increase profit and reverse a sales slump. Yahoo’s failure to keep pace with Facebook Inc. (FB) and Google Inc. (GOOG) in online advertising and social media has led to management upheaval, including the exits of Chairman Roy Bostock and co-founder Jerry Yang, and the ouster of CEO Carol Bartz.
“Scott’s going to radically transform this company,” said Benjamin Schachter, an analyst at Macquarie Securities USA Inc. in New York. More targeted cuts will likely follow, as well as selective hiring, said Schachter, who has a neutral rating on the stock.
“Scott Thompson was not the guy to take this job to cut to the bone and just drive cash flow without investing in new areas,” he said. “He’s there because he saw something in those assets where he could turn the business around.”
The shares rose less than 1 percent to $15.27 at the close in New York. The stock has dropped 5.3 percent this year.
Yahoo’s revenue, excluding sales passed to partner sites, declined to $1.17 billion in the fourth quarter. Income from operations in the first quarter will be $105 million to $155 million, Yahoo said, shy of the $184.2 million that analysts had projected, according to data compiled by Bloomberg. Yahoo is scheduled to announce the results on April 17.
“Today’s actions are an important next step toward a bold, new Yahoo -- smaller, nimbler, more profitable and better equipped to innovate as fast as our customers and our industry require,” Thompson said in a statement. “We are intensifying our efforts on our core businesses and redeploying resources to our most urgent priorities.”
Thompson plans to focus on media, communications, data that can help advertisers tailor marketing to users, and the technology that supports various core businesses, according to a letter he sent to employees that was obtained by Bloomberg News.
“Over the last 60 days, we’ve fundamentally re-thought every part of our business,” he said in the letter. “We will continue to actively consider all options that allow Yahoo to put maximum effort where we can succeed.”
The turnaround process will not be quick for Thompson as he tries to distinguish Yahoo from its competitors, according to Gene Munster, an analyst with Piper Jaffray in Minneapolis. One option Thompson could consider: buying Hulu LLC, the provider of premium video content, Munster said.
“I think it’s going to take 5 years, said Munster, who has an “overweight” rating on Yahoo. “We’re going through a phase of Yahoo figuring out who they are. I think that’s going to have a negative impact on total head count.”
Thompson was formerly the president of EBay Inc.’s PayPal unit. There, he helped more than double revenue at the payments service while boosting the user base to more than 100 million.
At Yahoo, he’s grappling with a planned proxy fight by investor Third Point LLC, which owns about 5.8 percent of the company. The investment firm is trying to get four nominees, including Third Point CEO Daniel Loeb, onto Yahoo’s board.
Yahoo added three new independent directors last month, after failing to reach an agreement with Third Point to put some of the investor’s picks on the board. Yahoo also added two directors in February, while announcing that Bostock and three other members wouldn’t seek re-election.
Third Point faulted Yahoo today for embarking on the job cuts without having a more complete strategy in place.
While the staff reduction “was unfortunately necessary and widely expected, Third Point, Yahoo’s largest outside shareholder, is disappointed that this round of cuts occurred before CEO Scott Thompson has articulated his strategic plan for the company,” Third Point said in a statement. “Shareholders deserve a management team and board who have a vision and strategic plan.”
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